Friday, November 30, 2012

The same question has come up twice in the past week, so I thought it worth posting.A manager manages several different accounts for the same client. Some returns are money-weighted (MWRR), some time (TWRR). The manager wishes to consolidate the accounts to present a single picture. How should they do this?First, from what perspective are the returns being presented? That is, are you telling the client how THEY did, or how YOU, the manager did?If the former, then I'd report everything as MWRR. In fact, I think that it might be reasonable to aggregate all the information and derive a single MWRR, although it might be better to asset weight the money-weighted returns; I'd want to spend more time on this before committing to one way or the other.If the latter, then I think I'd asset weight the individual returns to derive the overall return. This means, asset weighting both the MWRR and the TWRR.Can we mix MWRR and TWRR? Why not? In this context, each represents how the manager did. Asset weighting tells us overall how the manager did. Can we calculate MWRR for short time periods? Yes, as short as you would like. I'll try to work up some examples.Have some thoughts on this? Please offer your comments.

Thursday, November 29, 2012

I participated in the rewriting of the wrap fee (aka SMA (Separately Managed Account)) guidance, as a member of the then AIMR-PPS(R) Implementation Committee. This was the rewrite of the earlier rewrite, that was handled by a single (un-named) member of this committee, which resulted in a then record number of negative responses from the industry when it was put out for public comment. The committee was broken into two subcommittees, and I chaired one. The rules were loosened a bit, allowing, for example, wrap fee managers to look upon the wrap fee sponsors as their clients. We thought this made perfect sense.Now, for the opinions which I've held for well over a decade.Why, dear reader, must a wrap fee manager who claims compliance with GIPS(R) (Global Investment Performance Standards) be required to put their wrap fee accounts into a composite?Some key points to consider:

It is my opinion (one that has been confirmed by more than a few wrap fee managers) that wrap fee sponsors rely primarily on the institutional composites to determine if they want to add the manager to their suite of managers

The manager's "client" is the wrap fee sponsor. The individuals who do the investing are the clients of the sponsor. Okay, the manager signs up to be the discretionary manager, but rarely if ever actually meets with or speaks to the end client.

The wrap fee sponsors are not "GIPS compliant." They are the ones who market their suite of managers to their clients, and use whatever performance materials they feel are appropriate (and that meet the requirements of the Securities & Exchange Commission (the SEC)). Yes, the manager is to encourage the sponsor to use their materials, but the sponsor is not required to.

It is quite a challenge, even given the revised guidance, for wrap fee managers to bring their wrap fee accounts into compliance and to maintain these records. The composites and presentations that are created serve little if any purpose.My recommendation: Drop the requirement!Make it OPTIONAL for wrap fee managers to bring these accounts into compliance. If they feel that the composites have value, GREAT! But, in all likelihood, they will rely upon their institutional track record to be awarded the coveted role as a manager to be offered to a sponsor's clients. If no institutional composite exists, or if it has become inactive, then I'd favor the requirement for a composite, but otherwise think it should be optional.I would treat this the same as non-fee paying accounts. They are not required to be in composites, but can be included if the manager wants to. Likewise, the wrap accounts wouldn't be required to be included in composites, but could be if the manager felt there was some value to do this. The verifier would be required to verify that the excluded accounts are, in fact, wrap fee, but beyond that, no additional work would be needed. Such a move would (a) save the manager lots and lots of time and expense to maintain these records and (b) save on their GIPS verification, as these wrap fee composites could be dropped.Have a different view? Think this is silly, crazy, nonsense, or worse? Please chime in! I'm all ears. My guess is that the GIPS Executive Committee (EC) is hard at work on GIPS 2015. Wouldn't this be a great time to remove this rule?

Tuesday, November 27, 2012

A colleague asked me for some details on bottom up attribution. I then asked for the context in which he was speaking, since knowing the context is important.If we're talking about a "bottom up" manager, who doesn't take allocation into consideration, one could argue that contribution is sufficient. However, there will still be allocation, though perhaps unintended, unless the manager is successful at being market neutral throughout (i.e., regular rebalancing to match the benchmark). Otherwise, "allocation risk" could occur, which could detract from the portfolio's performance. The "Brinson type" models will still be effective to evaluate a bottom up manager, by showing the unintended allocation effects, and should arguably be considered. If we're speaking in the terms of "nested attribution," for example where we evaluate the portfolio at the asset class (equities, fixed income, cash) and styles (large cap growth, large cap value, etc.), then we're speaking of adding the lower level effects to arrive at the higher level ones. There ARE attribution systems that behave this way, but they're arguably flawed, as I've shown in the past: the results are sometimes simply nonsensical.Steve Campisi wrote an article for The Journal of Performance Measurement ("Balanced Portfolio Attribution," Winter 2008/2009) where he provides an interesting way to handle nested attribution. A colleague and I will discuss this topic at a webinar in early 2013; details to follow. With the absence of agreed upon "best practices," we are bound to have various approaches, some of which don't quite work as well as they should. Steve's does, and it will be presented during this webinar.As an aside, I think there's a fundamental belief that some hold, that summing up from the bottom, be it for returns or attribution effects, yield a more precise number; I generally disagree. I'll try to take this up in greater depth at another time.

Sunday, November 25, 2012

When I teach our Performance Fundamentals and Attribution classes, I often say how we frequently borrow concepts from other places: attribution is just one example. We didn't come up with the idea of attributing an event to a cause, or determining how various causes contributed to an outcome. Today's post deals with an attribution that has nothing to do with performance. It is also a bit of a delicate subject, so I hope it's okay.The subject: prostate cancer.I just turned 62. As I understand it, by my age roughly 60% of men have had prostate cancer. I had a physical recently, and I was told that the condition of my prostate is somewhat "unique." That is, it's in very good shape. Unlike those men you see in some commercials, I don't find myself having to rush to the bathroom multiple times a day or throughout the night. I recall playing a round of golf with three much younger men. We all had plenty of fluids to drink during the first part of our round. When we got to a hole with a bathroom, the three young guys rushed to the bathroom while I stayed in the cart. And so, what to attribute to my apparently quite healthy prostate? I've identified three possible causes.#1 My morning smoothie drink. For more than 10 years (probably close to 15) I've prepared a smoothie when I'm at home, that consists of the following ingredients:

One serving of soy powder. I read something many years ago that suggested that the use of soy might help reduce the risk of prostate cancer. And so, I've been a devotee. I use Solgar Iso-Soy Soy Protein/Isoflavone Concentrated Powder Natural Vanilla Bean Flavor which you can get from Amazon

1/2 tsp cinnamon. I had read that cinnamon is good for you, so I include a bit in my drink.

1 tbsp EVOO (extra virgin olive oil). I understand that we are to consume at least some olive oil daily, and so by including it in my morning drink, I'm guaranteed having it.

1 cup blueberries. I use Wyman's frozen wild blueberries. They're high in antioxidants. You can get them at BJs and Costco.

3-4 frozen strawberries. Also high in antioxidants. Also taste good!

1/2 cup orange juice

1/2 cup grapefruit juice

1 cup skim milk (a way to get calcium)

1 banana (for potassium).

When I'm home, I start each day with this drink. It makes about 32 ounces, which I consume at one time. You could split it between two days, of course. It is, I think, fairly high in calories, so you might want to consider this. I happen to think they're very healthy calories.#2 High consumption of fluids. Empirical evidence shows that I consume a much higher amount of fluids than most people. During the day I drink a lot of coffee (decaf; in the AM), water, and diet soda. Could this have anything to do with my healthy prostate? I have no idea, but looking for things that are obviously different suggests that it's a candidate.#3 Heredity. It's possible that I have "good genes," though I don't have any easy way of finding out. My father died at 69 from pneumonia (he was a "recovered" alcoholic and heavy smoker; I don't know if he had prostate issues). His father was older when he died, but I have no evidence to suggest that he had a good or bad prostate. Details of my maternal grandfather's demise are unknown to me; I never met him, and his is an interesting story that I'll save for some other time.There is, of course, a fourth possibility: unknown cause. I have faith in my daily drink, and believe that what I include is all healthy stuff, some of which reportedly combats cancer. While I've never heard anything about fluid consumption being good or bad for cancer prevention, knowing that my intake is higher than most suggests that it's at least a possibility.When men turn 40 they begin to get tested for prostate cancer, and this continues for the rest of their lives. I now get annual physicals. Fortunately, my prostate is healthy. My only reason for sharing this today is because I am fully aware of the potential effects of a bad prostate. I have friends my age who often have to stop to rush to the bathroom. I don't. I sent my formula to one prostate cancer research facility, who didn't seem to be impressed, which is fine. And perhaps you won't be, either. But prevention is a good thing. And while I cannot guarantee that this drink is a good thing, it's a daily routine for me whenever I am home. My mother died of cancer when I was very young. I've had other relatives and friends who've died of cancer. And so, prevention and awareness is very important to me. Thus, this post. I hope it's well received.A disclaimer: I am, of course, not a medical authority or practitioner. I am simply sharing something that I do. I cannot offer any guarantees whatsoever, or offer any further guidance. I have faith in it, thus my daily devotion and interest in sharing it with my readers.

My wife and I recently came across this sign on the front door of a medical facility where we had an appointment. If we are obligated to follow these instructions, we must attempt some other means to gain access to the building. No doubt when the creator of the sign wrote it, they didn't think that the words "at all times" are an absolute, and leave no exceptions. In life we often encounter absolutes tossed about when they shouldn't be: "they always lose," "this always happens to me," "you're always late," "you never ..."When we write instructions, we should be careful that the words reflect our intended meaning: that we don't say too much, nor too little. The Global Investment Performance Standards (GIPS(R)) occasionally uses absolutes, when in reality they're not meant. For example, we know that "all actual, fee paying, discretionary portfolios must be included in at least one composite." But we also know that there are a few exceptions to this rule (e.g., portfolios that are excluded because of significant cash flows, because they've fallen below the minimum, because they haven't been managed long enough, because they're transitioning from one composite to another). Almost 40 years ago, when I was stationed in Hawaii with the 25th Infantry Division, I had the "extra duty" of being our artillery battery's race relations officer. One of the things we would tackle was prejudice, which is typically built around absolutes: "all black people ...," all Jews ...," "all whites ...," "all Hispanics ..." In reality, we know that the "all" never applies to any group. There seems to be plenty of evidence to support avoiding absolutes, in just about all areas of our lives, unless they really apply ("never do illegal drugs" would be an example that I think does work).The words we use count. My wife and I have become fans of The Big Bang Theory, and Sheldon is great at dissecting the words people use (I'll confess that I am sometimes guilty of this too; an example: when a waitress tells you, "if you need anything, my name is Mary," might cause one to ask, "what's your name if I don't need anything?").After conducting verifications, I want to make sure my feedback is clear to our clients. Sometimes I find myself writing "you should ...," when "you must ..." is more correct. I generally refrain from telling someone things they must do, but the reality is that to avoid confusion, such wording is sometimes needed.Someone once said that there's no such thing as writing, just rewriting. This applies to everything we write, whether it's emails, letters, reports, or the words that are to appear on signs. Even blog posts!

Monday, November 19, 2012

If your firm complies with the Global Investment Performance Standards (GIPS(R)), then you need to be familiar with the new guidance statement on alternative investments. The Spaulding Group's Jed Schneider, CIPM, FRM will host a webinar tomorrow, Tuesday, November 20, to provide some insights into this important document.To learn more about the webinar, please contact Jaime Puerschner.

Wednesday, November 14, 2012

My wife and I are on vacation this week in beautiful Aruba, to celebrate our 40th wedding anniversary. And so, rather than detract attention to the woman I love (save for this single post, while she's showering), I won't post again until next week. Hope you understand, dear reader. I have my priorities, and this week it's my wife.

Thursday, November 8, 2012

The Spaulding Group will hold its second annual webinar conference next week, and the subject is RISK! Each day there will be a different topic and speaker. Details can be found on our website. This conference format (one topic/speaker per day for five days) provides a cost effective way to bring training to your firm. Everyone is concerned with risk, and there are no doubt topics you'll find of interest. The response has been tremendous, but if you want to take advantage of this session, you should sign up by this Friday. Please call our offices (732-873-5700) or email Jaime Puerschner for more details or to sign up. You can also sign up on line. Don't miss out!

Monday, November 5, 2012

I have a confession to make: I used to be 6' 1/2" tall (I liked the 1/2", because it put me ABOVE 6'). My father was 6'6", my older brother roughly the same, and my younger brother is, I think, around 6'2". My two sons are both taller than I am. And so, I can be thought of as the (a) runt of the litter and (b) still the shortest guy in the family. (Okay, it's true that I am taller than my grandsons, but they aren't fully grown, yet).Sadly, I am no longer 6' 1/2" tall. Gravity has set in (so they tell me) and I am now 5' 11"; i.e., LESS THAN 6'. Yes, I've needed therapy to deal with this, but I'm managing quite well, thank you.And yes, I know that I am still taller than average, so have no complaints. But in this post, I'm speaking about a different kind of short. I'm speaking of shortness in time.John Simpson, CIPM recently conducted a webinar on the mathematics of multicurrency: a session that was very well attended. One participant raised a question regarding the possibility of instantaneous measures of change. If you have a mathematics or physics background, you can probably relate to this. I recall in calculus, where we're introduced to the idea of shortening the measurement period, so as to find the instantaneous changes. The question: should we concern ourselves with instantaneous changes in returns, or perhaps more correctly, valuations? My reaction is that this is of little value, and I would discourage doing or pursuing it. I have heard some folks ask for intraday returns (which isn't quite as short as instantaneous, but it's moving in that direction), and am concerned that this could be something we'd adopt. Investing is supposed to be long term, is it not? Looking at short periods introduces noise and causes frustration. This past summer we replaced the robot (vacuum) for our swimming pool. It was very different from the ones we previously had. Someone from the company urged me NOT to watch it as it worked, as it would cause frustration, as I'd see it miss things here or there, or fail to see it move into certain parts of the pool, and might wonder if it's working properly. Instead, I was advised to step away and look back after it's been given several hours to work. There are, I believe, only four reasons to calculate performance within a month (i.e., to calculate daily performance; more correctly, value the portfolio so that we have a point in time to measure from):

Because someone has asked "what's my month-to-date performance" or "MTD returns are included on a report (portfolio managers often want to see MTD results, and this is fine)

To improve accuracy, by revaluing the portfolio for large or, better yet, all cash flows

Because an account terminated, and we wish to calculate the return up to the point where management ceased

It's a new account, and we want to start the valuation on the date it began being managed.

Disagree? Have other thoughts? Please chime in!I should add: there is nothing to be gained from an accuracy perspective to move to instantaneous or daily valuations/calculations; cash flows are the primary delimiter for valuations (and period ends, of course). In addition, daily valuation is fine and becoming standard, and I support this.

Thursday, November 1, 2012

Hurricane Sandy left many of us without power; fortunately, our office has electricity. And so, we invited our employees to bring their spouses and/or children with them, to have a chance to warm up, relax, and even have a hot shower. Most took advantage of the offer, and so we had several extra folks in our offices these past couple days (and expect to still have a few tomorrow). While some of us now have electric back on at our homes, many still do not.I consider it a blessing that our office had electricity and the other amenities, thus allowing for us to provide a respite for our colleagues' families. The children (numbering eight, I think, at our max) handled the situation quite well, hunkering down in our conference room, which has a TV, and a large table which allowed them to do various projects. The youngest members (our two grandsons) made the whole office their own, crawling (Caden, who will be one in less than three weeks) and walking (Brady, who turned three in August) around, visiting with everyone.

I guess it's called making the best of it, and I think we have and will continue to do so. While the gasoline lines are quite long, and many remain without power (and of course too many suffered very badly), we will continue to count our blessings and be patient with those dedicated souls who are working to return our lives to normalcy.

Spaulding, David Spaulding

About David Spaulding

is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html

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